FYI: 4th Cir Rejects Bankruptcy Trustee's Effort to Hold Bank Liable for Fraudulent Transfers

The U.S. Court of Appeals for the Fourth Circuit recently held that certain deposits and wire transfers into a bankrupt debtor's personal, unrestricted checking account in the ordinary course were not "transfers" under § 101(54) of the Bankruptcy Code, affirming the district court and bankruptcy court's entry of summary judgment in favor of the bank in an adversary proceeding brought by the bankruptcy trustee.

 

A copy of the opinion is available at:  Link to Opinion

 

The debtor orchestrated a Ponzi scheme that unraveled in 2009, in which "he defrauded his friends, family, and acquaintances out of millions of dollars under the guise of investing their money in a purchase order factoring contract business."  The debtor was convicted of wire fraud and money laundering.  Eight individual creditors filed an involuntary bankruptcy petition under 11 U.S.C. § 303 against the debtor. 

 

The bankruptcy trustee filed an adversary proceeding on behalf of the bankruptcy estate against the bank where the debtor had his personal checking account, alleging that certain deposits and wire transfers from "investors" constituted fraudulent transfers "made with the actual intent to hinder, delay, or defraud creditors, and that they were therefore avoidable" under 11 U.S.C. § 548(a)(1)(A).

 

The bankruptcy court granted summary judgment in the bank's favor, reasoning that the transfers from the debtor the bank "neither diminished the bankruptcy estate nor placed the funds beyond the creditors' reach, and they were therefore not avoidable as fraudulent transfers." The district court affirmed, and the bankruptcy trustee appealed to the Fourth Circuit.

 

On appeal, the trustee argued that the bankruptcy and district courts erred because where actual fraudulent intent exists, "there is no requirement that the transactions diminish or otherwise move property away from the bankruptcy estate."

 

The bank countered that section 548(a)(1)(A) "requires that an avoidable transfer one 'of an interest of the debtor in property,'" and because the debtor deposited the checks and received wire transfers into his personal account, "he neither transferred his interest in the funds to the Bank nor diminished the bankruptcy estate, since [the debtor] at all times had access to and control of the funds."

 

The Fourth Circuit asked the parties to address the threshold question whether the transactions at issue were "transfers" at all under section 101(54) of the Bankruptcy Code before deciding whether they were avoidable transfers under subsection 548(a)(1)(A).

 

The Court found that the deposits and incoming wire transfers were not "transfers within the meaning of the Bankruptcy Code." It explained that courts are "divided on whether § 105(54)'s definition of 'transfer,' even interpreted as broadly as Congress intended, includes a debtor's deposits in his own unrestricted bank account in the regular course of business."

 

Relying on two Fourth Circuit decisions from 1930 and 1931 predating the Bankruptcy Code as well as the Supreme Court's 1904 decision in N.Y. Cty. Nat'l Bank v. Massey, which held that the deposit of money into a bank account creates an "ordinary debt" with the bank having an obligation to make the funds available to the depositor and "does not change the debtor's interest in the funds[,] the Court reasoned that "the better interpretation of 'transfer' does not include a debtor's regular deposits into his own unrestricted checking account [because] he continued to possess, control, and have custody over those funds, which were freely withdrawable at his will. Indeed, any funds in the account were at all times part of the bankruptcy estate. The Bank's mere maintenance of [debtor's] checking account does not suffice to make deposits and wire transfers in that account 'transfers' from [debtor] to the Bank." Accordingly, the Court "decline[d] to read § 101(54) to say otherwise."

 

The Fourth Circuit cautioned that it was not deciding whether "other types of deposits, such as those made to restricted checking accounts, would constitute transfers under § 101(54)", and that it held only that "when a debtor deposits or receives a wire transfer of funds into his own unrestricted checking account in the regular course of business he has not transferred those funds to the bank that operates the account. When the debtor is still free to access those funds at will, the requisite 'disposing of' or 'parting with' property has not occurred; there has not been a 'transfer' within the meaning of § 101(54)."

 

Thus, although the Court disagreed with the bankruptcy and district courts that subject deposits and wire transfers were "transfers" within the meaning of the Bankruptcy Code, it affirmed on the narrower basis that the transactions were not avoidable transfers under § 548(a).

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
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Mobile:  (312) 493-0874
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FYI: Statutory Interest Cannot Accrue on Charged-off Credit Cards, Says Kentucky Supreme Court

The Kentucky Supreme Court recently held that a debt buying company may not charge or collect statutory interest under section 360.010 of the Kentucky Revised Statutes on a credit card account the debt buyer acquired after the account was charged off by the original creditor.

 

A copy of the opinion is available at:  Link to Opinion

 

A consumer's credit card account was charged off by the original creditor and was sold to a debt buying company. In a collection lawsuit, the debt buying company sought judgment for the charged-off balance plus statutory interest from the date of charge off. In response, the consumer counterclaimed alleging that because the original creditor charged off her account, the debt buyer was no longer permitted to charge interest. In seeking statutory interest, the consumer alleged the debt buying company violated the federal Fair Debt Collection Practices Act (FDCPA).

 

The Kentucky Supreme Court held that once a credit card account is charged off and the original creditor ceases sending monthly statements, federal law prohibits further contract interest charges. Because the original creditor stopped assessing contract interest, it waived its right to collect "agreed-to interest." The Court held that this waiver amounted to a waiver of any right to assess interest, including statutory interest. As the assignee of the original creditor, the debt buying company had "no greater right to collect interest" and so could not seek statutory interest as part of its collection lawsuit.

 

The Court also found that the consumer stated a claim for violations of sections 1692e and 1692f of the FDCPA arising from the debt buying company's request for statutory interest in its state court collection complaint.

 

As the consumer's case was making its way through the Kentucky state court system, the Sixth Circuit Court of Appeals in Stratton v. Portfolio Recovery Associates held a consumer stated a claim for violation of the FDCPA when a debt buying company's collection lawsuit sought statutory interest under the same section of the Kentucky Revised Statutes at issue in this case.

 

But there was a dissenting opinion in the Stratton ruling, which criticized its holding because the issue of whether statutory interest could be charged in these circumstances was undecided under Kentucky law. The dissent in Stratton concluded that imposing FDCPA liability under such circumstances "impermissibly expands the scope of the FDCPA, exposing debt collectors to liability under federal law whenever we later determine a debt collector's reasonable construction of an as-yet uninterpreted state law is wrong."

 

To establish a waiver of a known contractual right, most decisional law (including Kentucky's) requires a demonstration that the waiver was "voluntary" relinquishment of a known right. The federal regulation at the center of this case and in the Sixth Circuit's ruling in Stratton is the Truth in Lending Act's Regulation Z (12 C.F.R. 226.5(b)(2)), which governs when periodic statements must be provided for open-end credit accounts.

 

The regulation excuses the sending of a periodic statement "if the creditor has charged off the account in accordance with loan-loss provisions and will not charge any additional fees or interest on the account . . ." Following the reasoning of Stratton and this ruling by the Kentucky Supreme Court, when a creditor makes this election under Regulation Z and stops sending periodic statements, it has decided it will no longer charge interest and has waived the right to charge interest.

 

The Kentucky Supreme Court ruling was not unanimous, and the dissent noted that the majority opinion misconstrued the federal regulation. The dissent noted that federal regulations require banks to charge off accounts to prevent them from inflating their net worth with assets that are noncollectible. Second, the act of charging off an account serves the purpose of terminating further use of the card and establishes the balance owed as a liquidated sum.

 

Under Kentucky law, the dissent notes, prejudgment, statutory interest is a "matter of right on a liquidated demand." Accordingly, the dissent concluded, the majority decision "punishes banks for their compliance with federal regulations and it bestows an unearned and undeserved windfall upon delinquent debtors."

 

The dissent's view that creditors have a "right" to seek prejudgment statutory interest on a liquidated claim is also contained in decisional law in other jurisdictions. Kentucky, however, has spoken and no right exists to charge interest on charged-off credit card accounts in Kentucky.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 8th Cir Confirms Doc Prep Fees Violate Missouri UPL Statute, Upholds Application to Out-of-State Class Members Due to Choice of Law Provision

In a "doc prep fee UPL" class action, the U.S. Court of Appeals for the Eighth Circuit recently affirmed a trial court's rulings as to class certification and application of a choice-of-law provision on a class-wide basis.

 

In so ruling, the Court also reversed and remanded the lower court's determination that the attorney's fees for the class counsel should be paid solely from the common fund in light of the fee shifting provision in the contract.

 

A copy of the opinion is available at:  Link to Opinion

 

The named class plaintiffs purchased a boat from the defendant, a nationwide retailer of sporting goods, equipment, and vehicles.  The retailer included as part of the transaction its standard form sales agreement, and a document fee for the preparation of that agreement. 

 

Plaintiffs filed their putative class action lawsuit in Missouri state court alleging that the retailer violated Missouri statutes prohibiting the unauthorized practice of law by charging the document fee for preparing the sales agreement. See Mo. Rev. Stat. 484.010 and 484.020. 

 

Following class certification by the state court, the matter was removed to the federal trial court by the retailer, where the retailer unsuccessfully moved to decertify the class. The federal trial court required plaintiffs' counsel to analyze the defendant's customer files to determine how many transactions included the standard choice of law provision which designated Missouri as the applicable forum, and thus, the nationwide class was limited to only those agreements.  Following this review, the class was determined to consist of approximately 100,000 members.  

 

Subsequently, the trial court entered summary judgment in the plaintiffs' favor, ruling that charging a document fee for the completion of the standard sales agreement constituted unauthorized law business in violation of Missouri Statute 484.020. 

 

The trial court awarded the class damages based upon the total fee amount charged by the retailer in each transaction, and trebled this amount as provided under the applicable Missouri statute.  Although the agreements at issue also contained a fee shifting provision, the trial court further determined that the class counsel should be paid from only the actual damages portion of the common fund - not including the trebled damages award - based upon Section 4 of the Clayton Act.

 

The trial appealed the judgment and fee award.  Specifically, the retailer argued that 1) class certification was incorrect because each contract was too individualized; 2) the district court incorrectly interpreted the Missouri statute for unauthorized practice of law; and 3) it was incorrect to apply the Missouri statute for transactions which arose outside of Missouri.

 

The plaintiffs filed a cross-appeal in which they argued the trial court erred in determining the amounts of the attorney fees award by not including the trebled damages award, and in not enforcing the fee shifting provision contained in the sales agreement.

 

First, the Eighth Circuit addressed the retailer's challenge to class certification.  The Eighth Circuit noted that the challenge encompassed the lower court's determination pursuant to Fed. R. Civ. P. 23(a)(2) and (b)(3) as to the commonality and predominance of class claims, as well as the implicit requirement for ascertainability. 

 

The Court recited that a class is ascertainable when its members may be identified by reference to objective criteria. Citing Sandusky Wellness Ctr. v. Medtox Sci., Inc., 821 F.3d 992, 996 (8th Cir. 2016).  In this matter, the Court found that the class was clearly ascertainable as it simply included all consumers whose sale agreements included the Missouri choice-of-law provisions and were charged the document preparation fee.  The Court further noted that the trial court required an intensive file-by-file review specifically for the purposes of excluding non-qualifying consumers. 

 

Similarly, the Eighth Circuit found that the class met the commonality and predominance requirements.  In doing so, the Court noted that the class was defined by the retailer's own corporate policy to utilize a standard sale agreement including the Missouri choice-of-law provision, and thus, the "case presented a 'classic case for treatment as a class.'" Steinberg v. Nationwide Mut. Ins. Co., 224 F.R.D. 67, 74 (E.D.N.Y. 2004).  Therefore, the Court determined that the identified class members all had the common and predominant issue as to whether the retailer's practice of charging a document fee in the standard form violated Missouri's statute prohibiting unauthorized law practice.

 

Second, the Eighth Circuit rejected the retailer's argument that the district incorrectly interpreted the applicable Missouri statute prohibiting the unauthorized practice of law as applied to the facts.  The Court noted that prior Missouri case law held that "charging a separate fee for the completion of legal forms by non-lawyers constitutes the unauthorized practice of law business."  Carpenter v. Countrywide Home Loans, Inc., 250 S.W.3d 697, 702 (Mo. 2008).

 

In addition, the Court noted that the standard sales agreement used by the retailer included a power of attorney form which has been previously determined to be a legal form in Missouri.  Accordingly, the Eighth Circuit affirmed the judgment entered by the lower court because "once it is determined that a particular document is legal in nature, the act of charging a fee for the preparation or compilation of that document constitutes unauthorized law business, even when a non-lawyer does not exercise any legal judgment in completing the form."

 

Relatedly, the retailer argued that the trial court incorrectly based the calculation of damages on the entire document fee charged even though the charges also potentially included non-prohibited activities.  The Eighth  Circuit found these arguments to be without merit.  As noted by the Court, the specific fee at issue was charged to the customers separately from the legitimate portions of the contract, and therefore, the damages were appropriately based upon the entire fee amount.

 

Third, the Eighth Circuit determined that there was no error in applying Missouri law to the class members whose transactions occurred outside of Missouri.  In doing so, the Court found no merit in the retailer's argument that the application of the statute was penal in nature, because the State of Missouri was not a party to the action or that the State of Missouri indicated that it intended to enforce the criminal portions of the Missouri statute.  Further, the Court held that the sale agreement had a valid Missouri choice of law provision which is binding upon the contracting parties. 

 

Accordingly, the Court affirmed the judgment entered against the retailer and denied the entirety of the retailer's appeal.

 

As to the cross-appeal by the plaintiffs, the Eighth Circuit found that the trial court did err in not enforcing the fee shifting provisions of the sales agreement, and instead providing payment to the attorneys out of the common fund.

 

In doing so, the Court noted that in cases with a contractual fee-shifting provision, the court must weigh the equitable principles underlying the creation of the common fund doctrine against the fee shifting provision agreed upon by the parties.  Initially, the Eighth Circuit quickly noted that an award under a fee-shifting provision is not necessarily dispositive of the amounts due to the class counsel, and that additional amounts may be due to counsel from the common fund.  However, the mere creation of the common fund "is not sufficient to establish a finding that the common fund doctrine must be applied when awarding attorney fees."  Haggert v. Woodley, 809 F.3d 1336, 1356 (Fed. Cir.). 

 

In weighing the equities, the Eighth Circuit determined that payment of the attorneys' fees under the fee shifting provision accommodates both concerns underlying the common fund doctrine, i.e. (1) class counsel is able to recoup reasonable compensation, and (2) there is no risk that the named plaintiff unjustly pays for the fees of the class counsel.  In addition, the Court found that paying the attorneys' fees from the common fund would be inequitable because it "nullifies the class's contractual right, as a prevailing party" to recover under the fee shifting provision agreed upon by the parties under the defendant's sales agreement. 

 

Finally, the Eighth Circuit held that if on remand, the trial court found that the class counsel was owed additional fees above and beyond those due under the fee shifting provision, that the trial court was to use the common fund as a whole - including treble damages - to determine the appropriate compensation. 

 

Accordingly, the lower court's decision to pay class counsel from the common fund was reversed and the issue remanded to the lower court for a determination as to the amounts due under the fee shifting provision and otherwise.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 11th Cir Holds RESPA Claim for QWR/RFI Violation Failed Under Spokeo

In an unreported ruling, the Eleventh Circuit Court of Appeals recently affirmed the dismissal of a borrower's federal Real Estate Settlement Procedures Act (RESPA) claim that the mortgage servicer failed to confirm receipt of the plaintiff's request for information because the servicer's signed certified mail receipt qualified as confirmation of receipt under the statute.

 

Importantly, the Eleventh Circuit also held that plaintiff's RESPA claim for statutory damages failed to allege an injury in fact under Spokeo.

 

A copy of the opinion is available at: Link to Opinion

 

A borrower's attorney sent the borrower's mortgage servicer a request for information under RESPA by certified mail.  The mortgage servicer received it and signed the certified mail return receipt on the same day.  The borrower's attorneys received the signed return receipt.  Nine days later, the mortgage servicer sent the borrower a substantive response to his request.

 

Months later the borrower sued the mortgage servicer claiming that it had violated 12 C.F.R.  §1024.36(c) by failing to correctly or timely acknowledge receipt of his request for information. The borrower asked for less than $100 in actual damages, statutory damages, and attorney's fees and costs.

 

The trial court granted the mortgage servicer's motion to dismiss with prejudice. On appeal, the Eleventh Circuit affirmed the district court's ruling.

 

As you may recall, Regulation X provides that a servicer who receives an information request from a borrower must within five days provide the borrower with a written response acknowledging receipt of the information request. See 12 C.F.R. §1024.36(c).

 

The Eleventh Circuit agreed with the trial court's reasoning that the mortgage servicer's signature on the certified return receipt that was returned the borrower's attorneys fulfilled the requirements of §1024.36(c).

 

The return receipt was signed by the mortgage servicer's agent, it was signed the same day it was received and thus was timely under the five day requirement, it was returned to the borrower's attorneys such that the borrower received the notice, and it informed the borrower that the mortgage servicer had received the request such that it satisfied the substance of the mortgage servicer's statutory obligations.

 

The Eleventh Circuit also affirmed the lower court's holding that, under Spokeo, Inc. v. Robins, 578 U.S. __, 136 S. Ct. 1540, 1548-49, 1550 (2016), the borrower did not have Article III standing to assert a claim for statutory damages because he had not suffered a concrete injury in fact. 

 

As you may recall, the Supreme Court held in Spokeo that an injury in fact is required for all federal lawsuits, and the injury in fact must be more than a procedural violation to meet Article III standing requirements.  The Eleventh Circuit affirmed the district court's holding that under the circumstances, at most, the borrower had suffered no more than a "bare procedural violation" and not a real concrete injury as a result of the mortgage servicer's supposed RESPA violation.

 

Accordingly, the Eleventh Circuit affirmed the trial court's judgment dismissing the borrower's complaint.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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